Revisiting the NPL problem

Another sharp rise in the non-performing loan (NPL) ratio in Q2 and recent stark warnings from the IMF have refocussed attention on India’s ailing banking sector. The Reserve Bank of India (RBI) has stepped up efforts to tackle the NPL problem, for example by introducing a debt-to-equity scheme. Meanwhile, there has been renewed talk of setting up a “bad bank” to remove NPLs from commercial banks’ balance sheets. But these schemes have limitations. The big picture is that the struggles of the banking sector are likely to continue in the absence of major capital injections and greater private participation.